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About REITs

REITs provide a simple way to invest in commercial real estate without the cost or illiquidity associated with owning property directly. Here are some of the common questions investors ask us about this unique asset class.

What are real estate securities?

Companies that issue real estate securities own and operate a portfolio of land and buildings such as shopping malls, offices or apartments. Many of these companies have relatively stable operating models focused on acquiring and improving these properties, which typically generate recurring income from rent payments.

What is a REIT?

A REIT, or real estate investment trust, is a special type of real estate security. By organizing as a REIT, real estate companies can take advantage of a special tax structure that puts shareholders on a level playing field with investors that own real estate directly. A REIT is required to distribute the majority of its taxable net income to shareholders and must adhere to certain restrictions on its operations, organization and ownership. In return, the REIT does not have to pay corporate taxes on the income and capital gains it distributes, thereby reducing or even eliminating its tax burden. Because of their minimum distribution requirement, REITs typically offer higher dividend yields than other equities with similar risk profiles.

What rules must REITs follow?

To qualify as a REIT, a company must adhere to specific rules as defined in each country’s REIT legislation. In the U.S., the requirements are as follows:

Since income is not taxed at the corporate level, the rule ensures that taxes are still incurred by REIT shareholders. These dividends are taxed as ordinary income.

Invest at least 75% of total assets in real estate, mortgage loans or shares in other REITs.

Its principal business must be real estate investing.

Derive at least 95% of gross income from rents, mortgage interest or gains from the sale of real property.

Its principal source of income must be real estate-related.

Be managed by a board of directors or trustees.

It must maintain a fiduciary responsibility to shareholders.

Have shares that are fully transferable, with a minimum of 100 shareholders and no more than 50% of its shares held by five or fewer individuals.

It must maintain a broad investor base.

Be structured as a taxable corporation.

It must be a for-profit company.

How did REITs come about?

REIT legislation was first introduced in 1960 in the United States, followed by the Netherlands (1969) and Australia (1971). However, these entities struggled to gain traction, as early laws placed severe limitations on how REITs could operate. In the United States, tax reforms in the 1980s made the REIT structure more appealing to both property companies and investors. In addition, REIT legislation was simplified to provide companies with greater operating flexibility.

The modern REIT era emerged in the early 1990s on the heels of a major downturn in commercial real estate values. For U.S. real estate operators, many of which were over-leveraged, the REIT structure provided a way to access capital from public markets, since bank financing was unavailable at the time due to the savings-and-loan crisis. As a result, more than 100 U.S. companies formed as REITs and became public between 1991 and 1997. Other countries began to implement similar legislation, resulting in the globally diversified REIT market seen today.

Which countries have REITs?

Commercial real estate has seen a dramatic shift from the private sector to public markets over the past 20 years. This has been due in large part to the increasing adoption of the modern REIT structure amid growing investor demand for listed real estate and global real estate allocations. Below is the current status of global REIT adoption:

What is the size of the global real estate securities market?

The global real estate securities market has a total market capitalization of approximately $2.1 trillion, spread across 479 companies (as of 8/31/2016). The U.S. accounts for 40% of the current market, with 25% represented by Asia Pacific and a relatively smaller portion from Europe and other regions. More than three quarters of companies in the global real estate securities universe are REITs or REIT-like structures, with the rest consisting of real estate development companies and non-REIT owner/operators.

At September 30, 2017. Source: FTSE, FactSet and Standard & Poor’s. Real estate securities represented by the FTSE EPRA/NAREIT Developed Real Estate Index. Percentages may not sum to 100% due to rounding error. See important disclosures and index definitions related to this chart below.

What types of properties do REITs own?

There are 14 major classifications of property types (shown in the chart below), each with unique characteristics based on its lease terms, barriers to supply and the factors that drive tenant demand. For example, hotels rent out rooms by the day, whereas an office lease may span 10 years or more. In general, companies that own properties with shorter leases are more sensitive to economic cycles, since rents and occupancy levels adjust more quickly to changes in demand. Property sectors that feature longer leases are somewhat less sensitive given their more-bond-like cash flows.

U.S. REIT Market, by Property Type

At September 30, 2017. Source: Cohen & Steers and FTSE. U.S. REITs represented by the FTSE NAREIT Equity REIT Index (property sector breakdown provided by the index). Percentages may not add to 100% due to rounding error. See important disclosures and index definitions related to this chart below.

Terms used in REIT financial analysis

NAV (net asset value) – similar to book value. NAV is essentially the marked-to-market book value of a company’s property investments, measuring the estimated market value of the assets less any liabilities. Using various inputs, analysts can estimate a company’s NAV and form an opinion about whether the share price is trading at a discount, a premium or parity to its underlying assets.

FFO (funds from operations) – similar to earnings. FFO measures a real estate company’s operating performance. It begins with net income and adds back the gains (or losses) from property sales, since they are non-recurring and do not contribute to the sustainable dividend-paying capacity of the company. It also adds in non-cash expenses like depreciation and amortization, because real estate tends to rise in value over time rather than depreciating like other fixed-plant or equipment investments. FFO per share is often used in place of EPS (earnings per share) when analyzing real estate companies.

NOI (net operating income) – similar to EBITDA (earnings before interest, taxes, depreciation and amortization). NOI measures the cash flow a property generates by subtracting property-level expenses (including real estate taxes) from the property’s revenues. It is therefore similar to the corporate measure of EBITDA.

Cap rate (capitalization rate) – similar to yield. A cap rate is an expression of real estate value in terms of yield. In general, the lower the cap rate, the better the property or portfolio of assets (i.e., better cash flow growth and good tenants). When used to characterize the purchase price of an individual property—for example, “XYZ REIT purchased the office building at a cap rate of 6.5%”—the cap rate is the property’s NOI (income less expenses) divided by the transaction price. A property’s current cap rate is the NOI divided by the estimated present value. The cap rate of a company is the company’s NOI divided by its gross asset value. Cap rates are sometimes quoted in terms of the spread to Baa corporate bond yields, where a negative spread may be indicative of high property prices.

Cohen & Steers and REITs

At Cohen & Steers, we have been helping investors access opportunities in the REIT market for more than 30 years. Established in 1986 as the world’s first investment manager dedicated to real estate securities, we are one of the largest shareholders of many public real estate companies. We have remained actively involved in the REIT community throughout our history, and have maintained a steady approach to investing, using our perspective gained over multiple market cycles.

As a global investment manager, our real estate strategies cover a wide range of markets, and allow investors to benefit from one of the largest and most experienced real estate securities investment teams. To learn how to invest with us, see Cohen & Steers Real Estate Securities Strategies.

Index DefinitionsAn investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes.
The FTSE NAREIT Equity REIT Index is an unmanaged, market-capitalization-weighted index of all publicly traded REITs that invest predominantly in the equity ownership of real estate. The FTSE EPRA/NAREIT Developed Real Estate Index is an unmanaged market-weighted total return index which consists of many companies from developed markets whose floats are larger than $100 million and who derive more than half of their revenue from property-related activities.

Important Disclosures
The views and opinions in the preceding commentary are subject to change and represents an assessment of the market environment at a specific point in time, should not be relied upon as legal, investment or tax advice and is not intended to predict or depict performance of any investment. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment. Investors should consult their own advisors with respect to their individual circumstances.

Please consider the investment objectives, risks, charges and expenses of any U.S. Registered open-end fund carefully before investing. A summary prospectus and prospectus containing this and other information may be obtained by calling 1-800-330-7348 or clicking here. Please read the prospectus carefully before investing.

Risks of Investing in Real Estate Securities
Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest rate changes and market recessions. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved.

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Cohen & Steers is a global investment manager specializing in liquid real assets, including real estate securities, listed infrastructure, commodities and natural resource equities, as well as preferred securities and other income solutions.

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